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The Echo Bubble In Housing Is About To Pop
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
And here's the knife in the heart of the Echo Housing bubble: declining household income.
The Federal Reserve-induced Echo Housing Bubble is finally starting to roll over, and the bubble's pop won't be pretty. Why is the bubble finally popping now?
All the factors that inflated the Echo Housing bubble are running dry. These include:
-- unprecedented low mortgage rates
-- FHA mortgage approvals for anyone who fogs a mirror
-- frantic cash buying by Chinese millionaires desperate to get their money out of China
-- the Federal Reserve buying up trillions of dollars in mortgages
-- lemming-like buying of housing for rentals by everyone from Mom and Pop to huge hedge funds.
The well's gone dry, folks. There isn't going to be another push higher or a third housing bubble after this one pops.
Let's start with the basics: demographic demand for housing and the price of housing. There are plenty of young people who'd like to buy a house and start a family (a.k.a. new household formation), but few have the job or income to buy a house at today's nosebleed level--a level just slightly less insane than the prices at the top of Bubble #1.
Charts courtesy of Market Daily Briefing)
It's considered bad form to describe today's prices as insane. It tends to hurt the feelings of everyone who's counting on the Echo Bubble to 1) make them even richer or 2) bail them out of the hole they fell into after Housing Bubble #1 popped.
Exhibit B is the insanely low mortgage rate, which has finally reversed course and is notching higher after 30 years of going lower. Why are today's rates insane? Risk. Mortgages are intrinsically risky. People who are terrific credit risks lose their jobs, experience horrendous medical crises, get divorced, etc., and the net result is a default that is unexpected.
Then there's all the credit-rating-of-501 crowd that was always one missed paycheck away from defaulting on their FHA/VA mortgage. Once the layoffs begin scything through Corporate America and struggling small businesses, those living paycheck to paycheck buyers of Echo Bubble housing will have no choice but jingle mail the keys to the bank.
Though they may still be drooling from the smack-like high of get-rich-quick fantasies, anyone buying rental housing at these prices is on the cusp of discovering a very painful reality: few can make money buying rental property at these prices, not once rents plummet as the global recession comes home to roost.
If we look at the ratio of mortgage dent to household income, the current level is still double the pre-financialization level. A slight decline from the insane levels of the bubble mania do not qualify as sane.
The Fed goosed the Echo Bubble by buying up an insane $1.75 trillion in mortgages, almost 20% of the entire mortgage market in the U.S. The Fed has kept buying mortgages to maintain this level, but the Fed is no longer expanding their mortgage holdings. That well has run dry.
And here's the knife in the heart of the Echo Housing bubble: household income-- stagnating for decades for 90% of households--has declined since the Bubble Top when adjusted for inflation. Please explain how declining real income can support nosebleed home prices now that mortgage rates have bottomed and started their inevitable rise from absurdly low levels.
If you want to believe the Echo Bubble can continue inflating, by all means take another hit of happy-housing-talk smack. But let me warn you--the high wears off.
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I see dead NINJAs.
With no credit whats the value of a home?
RIPS
The value of a home is and always has been as a place to sleep at night, out of the elements, to safely store your needed possessions, cook your food and raise family.
Inflation or interest rates do not change the value of a home, only the price.
maw-maw agrees with grumps.
she says that for the folks who bought a home for 100k in 2000, it doesn't really matter that the "price" zoomed above 200k and now will drop to 100k again.
but paw-paw is worried about municipal revenue from taxes when all those house prices drop. he says cities will have to double their tax rates to continue operations.
I say paw-paw has no reason for concern.
Because Detroit
The property tax rate in Manassas Park, Va went up 50% overnight in 2008. From 1.21 to 1.76% from one FY to the next if I recall the numbers. It was one of the hardest hit zip codes in the nation during the crisis and unfortunately where I bought my first home in 2002. Coincidentally it is known as a sanctuary city and has one of the highest illegal alien populations in the DC area. I'm sure one had nothing to do with the other though or at least that's what the city management and learned professionals tell me. Took me 6 years to break even and sell that place all the while living in a section 8 hell that it became after the crash. I consider my bit for king and country done after that fiasco.
Property Taxes are the core of the single family future prices - income is stable to down in many communities - the probability of major changes in property taxes greater than - in the next ten year horizon - is close to 100% over general inflation
the entire tax cost comes off as a multiple off the price of the property
income will not keep up - many will have to give it up who are on fixed income
The cash price is the real value. See cars that get past the banker's age limit. I remember reading an article, years ago, predicting that when the market got back to 2/3rd's of all home sales being settled in cash we'd find the bottom. Well, the FED postponed that inevitability, it would'a killed the banks. Gotta keep the debt slave zombies walking on the treadmill.
If the fed does what it wants, bans cash and implements significantly negative rates, the next housing bubble will make this and the last one look tiny.
<< frantic cash buying by Chinese millionaires desperate to get their money out of China >>
That's coming to a screeching halt at both ends:
Macau billionaire jailed in U.S. subpoenaed in foreign bribery probehttp://www.reuters.com/article/2015/09/27/us-usa-crime-macau-idUSKCN0RP2...
http://news.yahoo.com/chinese-businessman-arrested-smuggling-cash-us-025...
What do you think the odds are that cash is banned in the US in the next 10 years? How about the 10 yrs after that? TIA/Serious question
Zero since the largest trafficker and seller of narcotics, women, and arms is the USgov....hence they'll never dry up their ability to sell shit in the black market...
Bitcoin in NOT a solution....it came out of a NSA incubator lab or does everyone think that is a coincidence???
One caveat, if they go full Fascist and transact in the open and the sheep having money will be irrelevant because you get "vouchers", then they can ban cash mostly because there will be no point in having it....
I can barely hear myself think with all these damn bubbles popping all around me. Pretty soon I wouldn't be surprised if I have bubbles coming out my ass!
-- "Please explain how declining real income can support nosebleed home prices now that mortgage rates have bottomed and started their inevitable rise from absurdly low levels."
There's no reason for mortgage rates to go up. Its not "inevitable" at all. And young couples of all gender persuasions deserve their own homes. Its the American Dream so please respect that!
Yep, but real estate scams have been with us forever and now the Fed has joined the game. Too bad the sheep are dead broke and deep in debt already.......
Another Yellen speech will fix this right up. Maybe he should do weekly fireside chats.
Here in dryed up but sunny Commifornia a studio apartment is 1500/month! What was a mortgage on a 2+2 home in 2001.
But daddy and mommy will keep baby safe. Untill their 401K blows again.
Just wait till the boomers start trying to liquidate their first, second and third homes in search of cash to replace what they are losing in the markets and to downsize to a condo with no maintenance. The rich gen X/Y and millinials (aka, those not in boomers basements) will happily oblige from the excess reserves afforded by their Starsucks Paychecks...albeit at much, much lower prices from here.
You ain't seen nothing yet!
When that happens, I bet the Fed. gov. starts bulldozing empty houses, like some cities did the last time just to avoid upkeep. They(banksters) refuse to allow increased productivity(lower prices) to be passed on to the debt slaves.
A bit off topic:
I was watching teevee over the weekend and I noticed car dealerships are now running "pick-a-payment" commercials. I found this rather interesting in lieu of the fact that Wachovia was offering pick-a-payment mortgages at the top of the housing bubble. we must be near the very end of the sub-prime auto bubble for sure.
But the banks aren't really loaning.
Head of HUD who is Hispanic said "So many people who work hard and can't get a loan, we are going to fix that"
That means liar loans, they are always at the end.
Self employed are unable to get loans right now.
We just need to designate a bad bank, that will solve everything.
Oooops, already did that.
I don't know where you live but I hear those zero-down loans every Saturday am advertized. Not only that, but if you are a Vet, police person or some other similar special interst group it's also zero down according to a different radio ad.
There's lots of crap still being handed out and there's still 13 million houses in shadow inventory where no mortgage money has been paid for months but bankers have not evicted them yet.
In my short life span I've never seen anything like the last 10-12 years.
Been pricing some vehicles and you need to spend >30k to get anything that isn't basic trasportation. I'm old enough to remember when you could buy a home for $30k...........
WTF
Just wait awhile . I remember back in 82 or so when the banks parking lot was full of cheap repos
Here on our local news, nbcbs station they reported this morning that home sales were off due to buyers being nervous that inetrest rates may rise.
The retardation burns!
Bubble popping in San Francisco would be what--prices flat for a year?
You could only hope. More realistically, it'd crash as hard as it's risen.
Let us hope that we will have something of value for exchange when the markets get back to sanity level. Let's also hope that they don't raise propety taxes 1,000%.
Local Municipalities and Schools would have to go back to the basic services that they were setup to preform, its written in the town / county charters. That means they would have to cut all the Social benefit programs and fire all those workers. If they do than property taxes could be reduced or at least stay constant. I don't see that happening. What I do see is people fleeing the areas that have high taxes from bloated Municipalities and Schools. Those people will move to areas that haven't had that problem yet. So Detroits across the US. Basically don't be the last person to leave if you see the writing on the wall in your area.
Got to sell your home before you are off the hook for RE taxes, that is the problem.
We have one thing going in the Mohave Desert, Low taxes and a 50% drop out rate. Cigarette smokin retards.
Back in the late 70's, early 80's(uncapped variable rate mortgage days), there were a lot of houses catching fire.
YES - PROPERTY TAXES ARE GONNA FUCK THINGS UP JUST AS MUCH AS APPRECIATING HOUSING COSTS. ANYONE WITH HALF A BRAIN SHOULD BE AWARE OF PROPERTY TAXES AS A GREAT COMPONENT OF OVERALL LIVING COSTS.
Sorry for the caps, but Property Tax increases are a pet peeve of mine.
How can you be certain mortgage rates have bottomed? Surely any QE4 world include another dose of mortgages.
After the helicopters dump their load, WS banksters will come up with many "Innovative Financial Products" designed to separate that money from the people it was dropped upon.
Whos gonna pay mah mortgage and fill mah tank?
Obama, bro - check's in the mail.
If the Fed bought 20% of the mortgage market, Fannie and Freddie must have about 75%.
so many bubbles, so little trust.
Fonze advises to take a reverse mortgage, gov insured
https://www.youtube.com/watch?v=vhhGparW6KQ
bump
rates are low, really, because prices are so high that were rates any higher, you'd exclude some huge chunk of potential buyers.
Good time to buy rental property, eh?
Ransquawk: US Pending Home Sales (Aug) M/M -1.40% vs. Exp. 0.40% (Prev. 0.50%)
Negative M/M. wow
It is a worldwide phenomena. Latest reports from the Auckland,New Zealand auction rooms is that the Chinese buyers are disappearing. Politicians of western countries have done nothing to stop speculation in our housing markets to the detriment of a country's own people. Who are these elected representatives really working for...not their own people it would seem.Update...Sydney Morning Herald reports big drop off of sales as well, our Chinese pals are leaving the market.
>>>Who are these elected representatives really working for...not their own people it would seem.
Actually they ARE working "for their own people"; it's just too bad that you're not one of them.
Perhaps the time has come 'round at last... for Winston Peters!
the ratio of mortgage debt to income is not apples to oranges. Mortgage rates in the 80's were 10-15% and into the 90's still north of 7%. You can't afford to take on much debt with those rates. 3-4% is a different story.
Donor money needed, Africa?
(Russia too hard)
I'm not ready yet. Fixing my house up to sell. Moving as fast as I can. Buy me some time. Thanks
It's cheaper to buy than rent. Tons of advantages owning a home. What,,,I should sell and move to an apartment? Like when I was 21? No thanks.